Long tail

August 26, 1982: Johns-Manville, one of the largest US asbestos manufacturers, files for Chapter 11. The policies that covered its liability to the victims had been written decades earlier. A long-tail line is one where claims are reported and settled long after the premium is collected, sometimes a decade later, unlike property, where settlement closely follows the loss. The lag looks harmless. In practice it turns the liability insurer into the writer of a very long-dated option on future litigation. A policy priced to one year's verdicts gets paid at the much heavier verdicts of ten years later, and even a small annual gap compounds into a chasm. That is how the long tail multiplies social inflation, and why a reserve shortfall only shows up late.